FedEx Q3 2022 Earnings Results & Report

FedEx EPS Results

• Actual EPS: $4.59
• Consensus EPS: $4.69
• Beat/Miss: Missed by -$0.10
• One Year Ago EPS: $3.47
• EPS Beat Rate: 6 of last 8 quarters

FedEx Revenue Results

• Actual Revenue: $23.64 billion
• Expected Revenue: $23.33 billion
• Beat/Miss: Beat by +$306.88 million
• YoY Revenue Growth: +9.90%

FedEx (NYSE:FDX) (NYSE: FDX) is a global transportation, e-commerce and business services company headquartered in Memphis, Tennessee. Through its operating companies, FedEx provides time-definite express delivery, ground shipping, freight transportation, customs brokerage, logistics and supply chain services for businesses, governments and consumers.

The company’s services include domestic and international package delivery, less-than-truckload freight transportation, warehousing, fulfillment, supply chain management and specialized logistics solutions. FedEx also provides retail shipping, printing and business services through FedEx Office locations, along with technology and data solutions designed to support shipment management and logistics operations.

FedEx traces its origins to Federal Express, founded by Frederick W. Smith in 1971, with package delivery operations beginning in 1973. The company serves customers across North America and international markets throughout Europe, Asia-Pacific, Latin America, the Middle East and Africa. Rajesh Subramaniam serves as FedEx’s president and chief executive officer.

FedEx Q3 2022 Earnings Call Transcript

Key Takeaways

• FedEx Ground added 14.4 million sq ft of capacity since June and opened 24 major facilities—including nine just weeks before peak—expected to run more efficiently in H2.
• Labor shortages cost FedEx an estimated $470 million in Q2—primarily in Ground—pushing Ground margins to multi-decade lows.
• Hiring momentum surged with a record 111,000 applications in one week and 60,000 frontline hires since September, and FedEx expects labor cost pressures to partly subside in the second half.
• Q2 results beat expectations with an 11% increase in adjusted operating income, Express posting over $1 billion in asset-adjusted operating income, and full-year EPS guidance raised to $20.50.
• FedEx’s three growth levers—network optimization, full European and international integration (TNT merger by April 2022), and digital innovations in automation and machine learning—aim to unlock further profitability.

Presentation

[Operator]

Good day, everyone, and welcome to the FedEx Corporation Second Quarter Fiscal Year 2022 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx. Please go ahead.

[Mickey Foster, VP of Investor Relations at FedEx]

Good afternoon and welcome to FedEx Corporation Second Quarter Earnings Conference Call. The second quarter earnings release Form 10-Q and stat book are on our website at fedex.com. This call is being streamed from our website, where the replay will be available for about one year. Joining us on the call today are members of the media. During our question and answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate. I want to remind all listeners that FedEx Corporation desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance, may be considered forward-looking statements within the meaning of the Act.

[Mickey Foster, VP of Investor Relations at FedEx]

Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Please refer to the investor relations portion of our website at fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Raj Subramaniam, President and COO, Mike Lenz, Executive Vice President and CFO, and Brie Carere, Executive VP, Chief Marketing Communications Officer. Now Raj will share his views on the quarter.

[Raj Subramaniam, President and COO at FedEx]

Thank you, Mickey, and good afternoon, everyone. Let me begin by extending a heartfelt thank you to our more than 600,000 dedicated team members, especially those on the front lines who are working relentlessly to successfully deliver another robust peak season for our customers. As expected, we're seeing strong levels of volume in our network given unprecedented levels of shopping and shipping this holiday season. FedEx Ground had an outstanding cyber week with 100 million packages picked up during the first official week of peak. Our ability to handle this influx of packages has been years in the making as we've taken deliberate steps to enhance our unparalleled network to support customers large and small. This includes strategically adding more capacity across our network to support our growing customer base.

[Raj Subramaniam, President and COO at FedEx]

For example, at FedEx Ground, this means adding 14.4 million sq ft to our network, the equivalent of 300 football fields since June of this year. In Q2 alone, we brought online 24 major expansion projects, with nine of them starting operations in November, just weeks before peak. While it was important that these facilities were up and running to add to our capacity in time for peak, experience tells us that they will operate with increasing efficiency in the weeks and months ahead. As we shared on the Q1 call, overcoming staffing and retention challenges due to the constrained labor market has been a key focus. We continued to take bold actions in Q2 to hire and invest in our frontline team members and thus increase network efficiency. These actions, including pay premiums, increased paid time off and tuition reimbursement.

[Raj Subramaniam, President and COO at FedEx]

I'm pleased to share that we have made considerable traction in recruiting frontline positions. Last week, we exceeded 111,000 applications, the highest level in FedEx history. To put this in perspective, we had 52,000 applications the week of May 8. This has led to appropriate staffing levels of peak, including hiring more than 60,000 frontline team members since we last spoke in September. We delivered strong results for the quarter with an 11% increase in adjusted operating income, which exceeded our initial expectations shared during the Q1 call. Second quarter results include outstanding performance by our team at FedEx Express, where operating income on an as-adjusted basis exceeded $1 billion for the quarter. The ability we have at Express to flex our cost structure and network in response to changing market conditions positions us for long-term sustained profitability.

[Raj Subramaniam, President and COO at FedEx]

FedEx Freight also delivered a strong quarter with an operating margin of 14.7%. I'm proud of the team as they continue to focus on revenue quality and profitable growth. We estimate the effect of labor shortages on our Q2 results was approximately $470 million in line with our original expectations. Consistent with the first quarter, Ground once again bore the majority of these costs to the tune of $285 million. While Ground's results were negatively affected by labor challenges in the first half of the year, we are encouraged by hiring momentum as we look to the second half and are focused on retaining recently hired team members after the peak season concludes.

[Raj Subramaniam, President and COO at FedEx]

We know we have an excellent value proposition for employees, which we are strengthening even further with technology that enables employee-friendly, flexible schedule options, including the ability to pick up extra shifts when convenient or swap shifts with a colleague, all from the convenience of an app on their phone or computer. All of this to say, we anticipate cost pressures from constrained labor markets to partially subside in the second half of the fiscal year. Now, it's a good time to focus on what is ahead for FedEx. The FedEx business has been built over nearly five decades, and during that time, we have built networks and capabilities that are differentiated from our competitors and nearly impossible to replicate. Our customers and their customers value these networks and capabilities as we enable global supply chains to stay connected.

[Raj Subramaniam, President and COO at FedEx]

This has never been illustrated more clearly than during the last two years of the global COVID pandemic. Our industry has proven to be absolutely critical in delivering during this pandemic, whether it is business to business or e-commerce. Within this industry, our strategy is unique. Our future growth and profitability will be driven by our strategy, and we will drive total shareholder value over the immediate mid and long term. There is solid momentum in our base business as we continue to lean into the dynamic growth of e-commerce amid a robust pricing environment. In addition, we have other levers for profitable growth, including number one, increasing collaboration and efficiency to optimize our networks and business. Number two, driving improved results in Europe and international. Number three, unlocking value by digital innovation.

[Raj Subramaniam, President and COO at FedEx]

Our expanded collaboration across operating companies will drive cost benefits from lower delivery and line haul costs and better utilization of existing assets. Said differently, we'll utilize our air and ground networks in a smarter, more calculated manner. FedEx Freight trucks have traveled 4 million miles while operating on behalf of FedEx Ground this year. FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched nearly 50,000 times. We will continue to look comprehensively at all assets in our network, including stations, hubs, and equipment, to put the right package in the right network as the best service for our customers. As I highlighted earlier, the focus on collaboration also extends to our customers as we work to make their supply chains smarter.

[Raj Subramaniam, President and COO at FedEx]

This includes providing integration and common data platform opportunities and planning the best way to leverage our network flexibility for their volume needs. The second lever is continuing to improve our international profitability. Our international business, particularly Europe, remains one of our biggest opportunities. I was in Europe in October and was happy to note the excellent progress there as we build upon the success of station integration, which is completed in May 2021. We remain on track for the completion of our air network integration in April 2022, which will complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks. After April 2022, Paris' Charles de Gaulle Airport will serve as the main hub for all European and intercontinental flights.

[Raj Subramaniam, President and COO at FedEx]

Liège will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth. Brie will share more on what this enhanced value proposition means for our customers. Finally, we are unlocking value through digital innovation and our accelerated integration of data-driven technologies and enhanced digital capabilities ranging from increased network efficiency to customer experience improvements. For example, early package visibility enhances visibility of third-party trailers, thus improving customer collaboration, information sharing, and package prioritization. Model-driven estimated delivery date uses machine learning to provide a more accurate estimated delivery date and delivery day of packages to customers and recipients. Trailer load scan automation eliminates the need for a manual scan, enabling faster and more efficient loading while significantly reducing package touches.

[Raj Subramaniam, President and COO at FedEx]

These ongoing investments in network capacity, automation, and technology have helped FedEx build the most flexible and most responsive network in the industry, affording us significant competitive advantages. In closing, the successful execution of our strategies continues to drive high demand for our differentiated services. We remain confident in these strategies for the various reasons outlined. Our unparalleled portfolio of services, powered by the strength and reach of our global network, positions FedEx to deliver superior, sustainable financial returns and drive shareholder value for years to come. With that, let me turn this floor over to Brie.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

Thank you, Raj. Good afternoon, everyone. Q2 delivered our second consecutive quarter of 14% revenue growth, demonstrating the strong demand for our differentiated portfolio and our ability to drive revenue quality as a result. Constrained capacity has continued to support a favorable pricing environment. We are maintaining a brisk pace for repricing contracts, ensuring a high surcharge capture and yield improvements. We are working with large customers to identify opportunities to move their volume from our national network to our regional and local networks, freeing up additional capacity for small business customers. Small businesses rely on our market-leading transit times and our seven-day-a-week network to compete. They cannot afford to forward deploy inventory at the same scale as large retailers.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

Our domestic yield growth was 9.1% with fuel in Q2. Our general rate increase will take place in January, and we expect a strong capture rate. In January, the Ground Economy peak surcharge will be replaced by the new Ground Economy delivery surcharge at $1, solidifying the price point for our economy product. As a reminder, FedEx Ground Economy was formerly FedEx SmartPost. The landscape across the industry remains robust and positions us well for continued profitable growth. We are forecasting that the U.S. domestic parcel market will reach 134 million pieces a day by calendar year 2026, a remarkable 70% growth from 2020. E-commerce is expected to drive 90% of the parcel market growth.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

We have developed a tremendous portfolio of e-commerce solutions, and we are very confident that our competitive value proposition will enable us to continue to take share smartly in the addressable e-commerce market. As you all know, we have a diversified customer base globally as well as here in the United States. As such, we can confidently grow without the risk of a very large and disruptive customer negotiation. The U.S. domestic B2B market is also expected to grow. It will grow at a 5% CAGR through 2026. We are growing our digital capabilities to provide a range of visibility experiences that will give our B2B customers greater clarity, confidence, and control over their deliveries, especially in high data value verticals such as healthcare. Turning now to international.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

Our successful commercial and operational execution in response to COVID demonstrates our ability to grow profitably in an uncertain environment. Demand out of Asia continues to contribute strong revenue and profit performance, and our international e-com and peak surcharges are contributing to our yield growth there. Q2 Express International export yield grew 12% and volume grew 7.6%, which is outstanding year-over-year growth. International export composite yield grew to almost $54 per package, while average daily volume was more than 1.1 million. I am very proud of the international revenue quality results, especially given that we also had double-digit e-commerce growth internationally, which of course puts downward pressure on our package yields. International Priority Freight had a very strong quarter, with 34% year-over-year revenue growth year to date.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

With new variants of COVID causing uncertainty in the global recovery, we believe that air cargo capacity will remain constrained through calendar year 2022, and a full recovery is not anticipated until at least 2024. Export demand in Europe and APAC has fully recovered to pre-pandemic levels and capacity on international lanes remains scarce. We anticipate a continued favorable pricing environment and an embargo on our deferred services out of Asia Pacific for the foreseeable future. We are targeting both B2B and cross-border e-commerce market share internationally. We have identified the target lanes for B2B growth, where we have share growth opportunity, most notably in and out of and across Europe. As Raj alluded to, with the launch of our integrated air network in April, we will dramatically enhance our capabilities within and into Europe, creating benefits for customers around the world.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

More European customers will have access to next day and pre-noon delivery times for their intra-European shipments through our expanded portfolio of services. We will be able to offer customers an option of midday or end-of-day service inbound to Europe, giving our customers around the world more choice and flexibility while giving our global sales team more opportunities to pursue. These enhancements, along with our intra-Europe road services and industry-leading Europe to U.S. service position us with a very competitive portfolio. As we approach the final stages of physical integration this fiscal year, we are increasing the FedEx brand presence on the road in Europe by approximately 30%, including the rebranding of vehicles and facilities. Additionally, intercontinental e-commerce will contribute approximately half of the growth in the parcel market over the next decade.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

FedEx International Connect Plus, which launched across Europe, Asia Pacific, and the United States, enables us to compete more effectively in this growing e-commerce market. In addition to the improvements in our transportation portfolio, we are very focused on our digital solutions across the customer journey. We have launched our new account opening application in eight countries with very great results. We are seeing double-digit improvement in account openings and customers opting in for My FedEx Rewards, which of course is the only small business loyalty program in the industry. We have also launched our new FedEx Ship Manager application in more than 100 countries. This is the primary tool for our small business segment to ship with FedEx.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

With the modern, easy-to-use interface, a small business can now create a label and get the package out the door more than a minute faster than they could previously. We will launch this new FedEx Ship Manager in the United States in 2022. In summary, we are very confident in our commercial strategies for revenue growth and yield improvement. With that, I'll turn it over to Mike for his remarks.

[Mike Lenz, EVP and CFO at FedEx]

Thank you, Brie, and good afternoon, everyone. Given the historically challenging nature of peak season, along with the continued staffing challenges felt by numerous companies around the world, we're quite pleased with our second quarter consolidated financial results, with adjusted operating income up 11% year-over-year. While adjusted earnings per share was unchanged year-over-year, this year's effective tax rate was significantly higher as last year's earnings included a 71-cent per share discrete tax benefit from favorable guidance issued by the IRS. As we anticipated, most of the headwinds we experienced in the first quarter persisted through the second quarter, which dampened our Q2 profitability by an estimated $770 million. To further unpack our second quarter results, I will highlight several key drivers.

[Mike Lenz, EVP and CFO at FedEx]

The difficult labor market once again had the largest effect on our bottom line, representing an estimated $470 million in additional year-over-year costs. As I did last quarter, I'll separate the effect of the labor market into two components, higher rates and network inefficiencies resulting from labor shortages. Of the $470 million, we estimate $230 million was incurred in higher wage and purchased transportation rates. This included higher wage rates and pay premiums for team members and higher rates paid for third-party transportation services. We estimate network inefficiencies resulting from labor shortages increased costs by approximately $240 million. These costs include additional line haul, higher usage of third-party transportation, cost to reposition assets in the network over time, and recruiting incentives, all to address staffing shortages.

[Mike Lenz, EVP and CFO at FedEx]

Beyond the labor effects, our results for the second quarter also included the following headwinds. $90 million related to investments in the ground network, as Raj outlined earlier, that are critical to improving service and adding capacity. An estimated $75 million in incremental air network costs at Express due to the continued effect of COVID restrictions on our operations. Lastly, a $70 million effect year-over-year from higher federal excise taxes as the waiver ended on December 31, 2020. With that overview of the consolidated results, let's turn to the highlights for the segments. Ground reported $8.3 billion in revenue, a 13% increase year-over-year, with operating margin at 5.8%.

[Mike Lenz, EVP and CFO at FedEx]

The results at FedEx Ground in the second quarter, with operating income and margin down, are not where we would like them to be, and our teams remain very focused on improving performance. FedEx Ground operating income was down approximately $70 million, and in addition to the $90 million I mentioned earlier, results were significantly affected by higher wage and purchase transportation rates and network inefficiencies amidst the constrained labor market. FedEx Express adjusted operating income increased to over $1 billion and reported an adjusted operating margin of 8.8%, which was driven by higher yields and international priority volume growth, which more than offset the negative effects of continued staffing challenges and COVID-19 related air network inefficiencies.

[Mike Lenz, EVP and CFO at FedEx]

Freight had another outstanding quarter with an operating margin at 14%, 14.7% as revenue for Q2 increased 77% year-over-year, and operating income increased 33% year-over-year. Our Q2 results include a net pre-tax non-cash mark-to-market loss of $260 million related to the termination of the TNT Express Netherlands pension plan and a curtailment charge related to the U.S. FedEx Freight pension plan. I'll point you to our 10-Q filing this afternoon for more details on these charges. Now let's pivot to capital spending. Year to date, we spent $3.1 billion in capital as we continue to invest in our strategies for profitable growth, service excellence, and modernizing our digital platforms. Our capital forecast for fiscal 2022 remains at $7.2 billion and less than 8% of anticipated revenue.

[Mike Lenz, EVP and CFO at FedEx]

We ended our quarter with $6.8 billion in cash and are targeting approximately $3 billion in adjusted free cash flow for FY 2022, which puts us on pace to deliver over $7.5 billion in adjusted free cash flow for FY 2021 and 2022 combined, far exceeding our historical levels. These cash flows have provided extensive flexibility as we continue to focus on balanced capital allocation and strengthening our balance sheet. As a result of this flexibility, I am pleased to announce our board has approved a new $5 billion share repurchase authorization. As part of this program, we expect to enter into a $1.5 billion share repurchase program that will be completed by the end of the fiscal year, which is on top of the $750 million of repurchases in the first half of the year.

[Mike Lenz, EVP and CFO at FedEx]

This new program highlights the tremendous confidence we have in our business and underscores our commitment to driving value for our shareholders. During Q2, we also made a $250 million voluntary contribution to our pension plan, which mitigates PBGC fees and further strengthens the funded status of our plan for our employees, and we expect to make an additional $250 million contribution in February. As for our FY 2022 guidance, we are raising our full year adjusted EPS range to $20.50-$21.50 to reflect second quarter results and outlook for the second half of the fiscal year, as well as the expected benefit from our ASR transaction. This improved outlook represents another outstanding financial year with a year-over-year increase in adjusted EPS ranging from 13%-18% following our strong 2021 results.

[Mike Lenz, EVP and CFO at FedEx]

While the second quarter exceeded our expectations, uncertainty remains across many fronts, including the labor market. We are closely monitoring developments related to the federal vaccine mandate, ongoing pandemic developments, and inflation as we consider our outlook.

[Mike Lenz, EVP and CFO at FedEx]

Labor headwinds will persist in Q3, but the labor availability and network inefficiency component will continue to mitigate as we move through the quarter, given our progress to date and plans to address this. In addition, we do not expect a recurrence of approximately $1 billion in notable second half headwinds from a year ago that included the timing of variable compensation expense, historic severe winter weather, a one-time Express frontline bonus, and our commitment to the Yale Carbon Capture Initiative. In summary, the successful execution during the second quarter of our strategies amidst a very dynamic environment gives us confidence in our updated outlook for the remainder of fiscal 2022 and beyond. In closing, I do want to take a moment of personal privilege here.

[Mike Lenz, EVP and CFO at FedEx]

While not on these calls, many of you are familiar with John Merino, our longtime chief accounting officer who signed our 10-Qs and 10-Ks. John has been integrally responsible for the quality and integrity of our financial information. After 23 years with FedEx, he will retire at the end of this month. On behalf of the leadership team, I want to thank him for his service and record of accomplishment. Now before we move to the Q&A, our Chairman and CEO, Fred Smith, has joined us and would like to share a few words.

[Frederick W. Smith, Chairman and CEO at FedEx]

Thank you, Mike, and good afternoon to everyone on the call. As promised on the June analyst call, I am here to answer any questions specifically for me. Let me start by saying thank you to our hundreds of thousands of team members. This time of year is challenging, especially for those working tirelessly on our front lines. Your hard work and dedication to keep our Purple Promise for our customers is evident by the Q2 results Raj, Brie, and Mike have covered well today. Let me also thank John Merino for his outstanding work for FedEx as our Corporate Vice President and Chief Accounting Officer over these last 23 years. I'm pleased to announce we'll be hosting an investor meeting on Tuesday and Wednesday, 28, 29 June 2022 in Memphis. Mickey will share details after the new year.

[Frederick W. Smith, Chairman and CEO at FedEx]

I'll now pass it back to him to begin the Q&A portion of the call. Mickey.

[Mickey Foster, VP of Investor Relations at FedEx]

Now I'd like to open our question and answer session, and please remember, callers are limited to one question so we can accommodate everyone.

[Operator]

Ladies and Gentlemen, if you'd like to ask a question please press star followed by the number one on your telephone keypad. We'll take our first question from Brandon Oglenski from Barclays. Your line is open.

[Brandon Oglenski, Director and Senior Equity Analyst at Barclays]

Hey, good evening, everyone, and thanks for taking my question. Fred, thanks for joining the call. I guess, you know, the supply chain constraints that we've seen in the past year have been, you know, pretty steep. Through your context of looking at this industry, you know, how much of this rate increase in inflation that we see is gonna really result in stickiness or is this really transitory as we get things, you know, moving again?

[Frederick W. Smith, Chairman and CEO at FedEx]

Raj, you can take it.

[Raj Subramaniam, President and COO at FedEx]

Well, this is Raj. Let me answer that question. The supply chain constraints we're seeing today are twofold. One is because of the lack of supply of critical components like semiconductors, and the second is because of the congestion we're seeing in the port. Now, as you know, FedEx gets our traffic a few miles downstream from the port, and that supply chain is actually flowing pretty good through the United States. Of course, we're also flying over the top and, you know, delivering high-value goods from the global economy through the system. We expect the supply chain constraints to stay for some time. The air cargo capacity is gonna be constrained for some more time, and we are very well positioned for success here.

[Raj Subramaniam, President and COO at FedEx]

Let me also add this point that, you know, we have the network flexibility to scale up and down. The size and scale of our network is massive for us to be able to manage the cost accordingly as well. You know, for the foreseeable future, I think there is strong demand for our services internationally.

[Operator]

Next we'll go to Ravi Shanker from Morgan Stanley. Your line is open.

[Ravi Shanker, Managing Director at Morgan Stanley]

Thanks very much. Fred, would love your thoughts on the long-term competitive environment in the parcel space. Amazon just told us that they believe that they are now the largest parcel carrier in the country, and you've seen the USPS kind of ramp up capacity meaningfully in the last decade as well. What does this industry look like 10 years from now, kind of both competitively and kind of where and just what do e-commerce supply chains look like and what part of the business would you like to concentrate in?

[Raj Subramaniam, President and COO at FedEx]

Ravi, this is Raj. Let me just say this, you know, the e-commerce market is growing very strongly. As Brie pointed out the numbers in her remarks, we are in the center of that e-commerce growth ecosystem. You know, when you talk about any retailers and their omni-channel story, you know, what often gets missed is the FedEx story that's right behind it, underneath it. As you can see from our growth in these two fiscal years, we're gonna grow more than $20 billion. We are not lacking for growth. You know, when people talk about the last mile, sometimes or most times, they forget about the first few thousand miles.

[Raj Subramaniam, President and COO at FedEx]

Again, some of the statistics that people see and talk about are so misleading that I don't even know what to say about that.

[Operator]

Next we'll go to Kenneth Hoexter from Bank of America. Your line is open.

[Kenneth Hoexter, Managing Director at Bank of America]

Great, good afternoon. Raj, just as you think about the cost and you mentioned the decelerating labor impact that Mike talked about with Ground hitting the lowest margin level in nearly two decades, you know, Express, you know, it's obvious you have the structure set up for sustained growth, particularly with Europe and TNT integration. Brie talked about that. But now looking at Ground, should we expect some of those costs to subside as the labor you mentioned gets easier? Maybe just walk us through your thoughts on how Ground shakes out with the growth of e-commerce and the impact on margins.

[Mike Lenz, EVP and CFO at FedEx]

Ken, this is Mike. Let me just, you know, highlight a couple aspects there as you think about the second half. Ground had the most significant impact from the labor availability challenges. That again has significantly impacted margin and profit this quarter. As we move through the rest of the fiscal year, we'll see further mitigation of that somewhat in Q3, particularly in Q4. If you recall, you know, the labor market began to turn around that period of time, so we'll be lapping some of that. Plus, we will fully address the network inefficiencies. That said, we're not projecting any change in the labor rates because that is a step change that we think will persist.

[Raj Subramaniam, President and COO at FedEx]

Ken, let me add to that by saying this much. First and most important point is, the demand for our services is very robust. The pricing environment is very robust. The labor headwinds start to recede in the second half. The investments that we have made get more efficient as we go into the second half, and the technology investments that make us more efficient as well. We expect in the second half our e-Profit and operating margins to improve year over year, and we get double digits. I guess that answers that question.

[Operator]

Next, we'll go to Tom Wadewitz from UBS. Your line is open.

[Tom Wadewitz, Senior Equity Research Analyst at UBS]

Yeah. Thank you. I wanted to get a little more color on the labor market. It does seem like, you know, it's pretty tightly tied in Ground to your margin performance, whether you get traction on labor, and kind of how rapidly that develops. I guess is the assumption that you have that you convert a lot of the peak season labor to, you know, kind of ongoing, and then, you know, kind of how much visibility do you have to that? I guess also it seems like you're pointing to stability in your costs per hour, let's say, for labor, or are you assuming some further inflation and sequential increase, you know, in the cost per hour as you look out? Thank you.

[Raj Subramaniam, President and COO at FedEx]

Thank you, Tom. On the labor front, yeah, we had obviously headwinds in the first two quarters, and we actually, you know, it landed pretty much where we thought it was gonna be. Now we're seeing, because of the actions we're taking, considerable traction on the labor front. As I mentioned to you in my earlier remarks, you know, just last week we had 111,000 applications for FedEx. That's the highest in our history. Again, to put that in context, versus what we saw in May, that was 52,000. So you can see that we're making a lot of progress here. We are essentially staffed up for peak, and we think that we can hold on to the required labor through the second half.

[Raj Subramaniam, President and COO at FedEx]

The projections that we talk about now incorporate these assumptions. I don't know, Mike, if you want to add to that.

[Mike Lenz, EVP and CFO at FedEx]

No, Tom, you're thinking about it in the right format there. Certainly in December here, as the peak volume surge, we are continuing to navigate the network inefficiencies. But coming off a peak when we know the package handler count would otherwise perhaps go down further, we will stabilize that at a different level in order to optimize going forward. Just to reiterate, we're not assuming any reduction in the base pay rates, as it were, of labor in the market, because I think that's well documented. That's here to stay. We're managing to that going forward.

[Operator]

Next, we'll go to Chris Wetherbee from Citi. Your line is open.

[Chris Wetherbee, Senior Research Analyst at Citi]

Great. Thanks. Good afternoon. Wanted to talk about the guidance a little bit and sort of make sure that we understood the main drivers of the increase, particularly in the back half of the year. We have some of the cost dynamics easing, I think, into the back half. Obviously, comps from year-over-year are more favorable. If you were to look at the back half and think about Ground relative to maybe Express, if you could help us sort of parse out where you see the better opportunity and how that's reflected in the new guidance.

[Mike Lenz, EVP and CFO at FedEx]

Chris, let me go at it this way. First, the three key components for driving the second half of the year are the pricing initiatives, the labor aspects that we just covered, as well as the headwinds we had second half of last year. As Brie mentioned, we're being very thoughtful about the various pricing levers and initiatives. Recall that the GRI goes into effect in January and that the surcharges, certain surcharges that we announced back in September, first of those hit in November, so we only had one month in the second quarter, so that will hit the whole year as well as the ongoing contract renewals.

[Raj Subramaniam, President and COO at FedEx]

Those are three key things to keep front and center when you're thinking about drivers for the second half of the year. As far as the broader guidance overall, you know, Q2 was above our expectations. You know, as Raj mentioned, the labor impacts actually came in right in line with what we anticipated back in September. But we executed strongly on our revenue quality initiatives. We managed and deferred, you know, various expenses, and we were able to accommodate incremental demand, particularly from Asia-Pacific. The combination of the second quarter, our outlook for the second half of the year, and then of course, the impact of the ASR on share count is the last component in terms of when you think about the pieces of the overall annual guidance change.

[Raj Subramaniam, President and COO at FedEx]

Hopefully that helps frame that.

[Operator]

Next, we'll go to Jack Atkins from Stephens. Your line is open.

[Jack Atkins, Research Analyst at Stephens]

Okay, great. Thank you. I guess a question here for either Brie or Raj, but you know, when you think about your opportunity set in Europe, particularly on the revenue side, can you maybe talk about the cadence of unlocking some of the revenue and market share capture opportunities in Europe once the integration of TNT is finally complete here in April? You know, maybe help us think through what a fully integrated physical network with FedEx Europe and TNT will give you. You know, how will that help you with allowing for improved European profits overall?

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

Well, I think the short answer is we think post-April that we have the best value proposition if you look at the combined bundle of intra-Europe ground as well as intercontinental coming in and out of Europe. We will have the very best coverage of overnight service across Western Europe from Europe into the US. That combined with our leading ground service, we think that is just a great value proposition. As I mentioned, we're also making some pretty significant investments in our digital capabilities. When we talked about the new FedEx Ship Manager Online, we've already launched that in Europe, and we've had great traction with it.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

When we think about kind of post-April, we've got a great portfolio for B2B, and we are growing in e-commerce, which has been something that we haven't been able to do. If you look at the details that we released, you'll see that we're actually making room for growth for intra-Europe. We're trading up from our international domestic portfolio in Europe. We're making the right portfolio and customer mix decisions to also really make sure we get the highest revenue quality out of our European business as well. We feel really good about the business right now.

[Raj Subramaniam, President and COO at FedEx]

Jack, let me add one point to what Brie just mentioned. The ability for us to access low-cost intra-European networks for our international business in and out of Europe, that's a cost advantage as well, in addition to all the portfolio and revenue opportunities that Brie just talked about.

[Operator]

Next, we'll go to Duane Pfennigwerth from Evercore ISI. Your line is open.

[Duane Pfennigwerth, Senior Managing Director and Equity Research Analyst at Evercore ISI]

Hey, thanks for the question. Just on the balance sheet, and maybe the answer is we got to wait until June and look forward to seeing you in Memphis. How do you think about the balance sheet longer term and the balance of share repurchase relative to balance sheet improvement from these levels?

[Mike Lenz, EVP and CFO at FedEx]

Yeah, Duane, this is Mike. I think, you know, certainly opportunity to explore that further in June. I would just emphasize that, you know, the announcement of the authorization is just a logical evolution in where we have been in terms of capital allocation and strengthening the balance sheet. You recall, we paid down some debt in fourth quarter of 2021. We increased the dividend 15% this past June. We continue to thoughtfully invest in the business for efficiency as well as growth. This initiative is just part of the overall capital allocation. That's, you know, just the next step along the way, and we can elaborate more and explore further in June.

[Operator]

Next, we'll go to Jordan Alliger from Goldman Sachs. Your line is open.

[Jordan Alliger, VP and Equity Research Analyst at Goldman Sachs]

Yeah. Hi. Just a question on the labor front. Can you talk a little bit more about your progress on getting your core positions filled, sort of the full-time folks versus just the seasonal hires that you needed? Just a point of clarification. I just want to make sure I heard right on the margin for Ground. Were you saying the whole second half would average double digit? Hi.

[Raj Subramaniam, President and COO at FedEx]

Yes. The answer to that question, Jordan, is that, you know, we're targeting double-digit margins for the second half and improved year-over-year margins and improved year-over-year operating profit. In terms of your other question, I'm sorry. Say that again. I didn't quite understand it.

[Jordan Alliger, VP and Equity Research Analyst at Goldman Sachs]

My question was, you know, in terms of the hiring that you've talked about. You've talked a lot about the applications that have gone up. I'm just wondering in terms of actually the hiring of the core positions, not the seasonal employees, but the folks that you need sort of year-round, what progress have you made on that versus just sort of the 80,000 or 90,000 people you needed for peak?

[Raj Subramaniam, President and COO at FedEx]

We, you know, hired at the rate of 10-12,000 per week since Q2. Again, our objective here is to make sure that we know that these team members stay with us post-peak and that we have the labor situations to make our networks more efficient. You know, the whole problem was our networks were inefficient, and now even as we speak, we are, you know, reloading packages back to what it should be in the first place. That's what's gonna make the difference.

[Mike Lenz, EVP and CFO at FedEx]

Hey, Jordan, this is Mike. Another aspect as we've, you know, aggressively addressed this situation is in terms of the flexibility in terms of scheduling and engaging employees such that it's not as binary as, you know, full-time, part-time there, and that there's the scheduling flexibility helps as well in terms of navigating labor availability when and where you need it.

[Operator]

Next, we'll go to Brian Ossenbeck from JPMorgan. Your line is open.

[Brian Ossenbeck, Senior Analyst at JPMorgan]

Hey, good evening. Thanks for taking the question. A couple follow-ups for you, Mike. You mentioned the vaccine mandate for federal contractors. Obviously, that was put on hold by a court last week. Did that actually give you some, you know, some cushion to work with? I guess, can you tell us if that was a factor in terms of, you know, hiring people and if that was a headwind that you're now sort of relieved of? Then also, you mentioned the ASR impact on EPS. I think it's 80% complete when it's agreed upon. I imagine you can put a number around that for us, so please do that if you can. Thank you.

[Mike Lenz, EVP and CFO at FedEx]

Yeah, Brian, it obviously depends, you know, on the precise timing and market conditions, but it would be somewhat north of $0.20 per share for the balance of the year in terms of the overall annual EPS. You know, as it relates to the hiring, as Raj said, we set a record in terms of applications two weeks ago for hourly positions vacant. You know, we expect to continue to see progress on that front, and we'll be very mindful of how that evolves.

[Operator]

We'll take our next question from Scott Group with Wolfe Research. Your line is open.

[Scott Group, Managing Director and Senior Analyst at Wolfe Research]

Hey, thanks for the question. We're gonna as we start to lap some of the tougher yield comps, how are you thinking about yield growth in the back half of the year? Raj, I wanna just ask you big picture or Fred, it does seem like there's a massive margin opportunity for the corporation relative to peers. You've maybe talked about some initiatives, but any way to quantify what you see in terms of the initiatives or the opportunity set?

[Frederick W. Smith, Chairman and CEO at FedEx]

This is Smith here. There is a massive margin improvement opportunity. Raj, you can talk about the rest of it.

[Raj Subramaniam, President and COO at FedEx]

The core business is very strong. We are in the middle of a very robust market and a pricing environment. As I've said before, on the e-commerce market growth, we are in the center of it. We are in the center of this ecosystem, and in it, this has got both volume and yield opportunities. Our core B2B business is very strong. In addition to that, we have three levers. One is the ability for us to optimize across our operating companies and to make sure the right package goes on the right network and be very smart about how we spend our assets and use our capacity.

[Raj Subramaniam, President and COO at FedEx]

The second is the turnaround opportunity or the upside opportunity, I should say, in Europe as we finish up the physical integration and to the point that Brie talked about in detail earlier. Lastly, the ability for us to deliver value for all our stakeholders from our digital innovation. There's a lot of work going on in this regard. We are sitting on so much global insights about the global supply chain every single day, and we're working with our customers to provide those insights, and there's value there as well. There's significant opportunities to go above and beyond our base. Now, Brie, do you wanna add to that?

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

Yeah, absolutely. Just want to kind of double-click on the pricing environment in the back half. Yes, the comps are aggressive, but we still believe that there is upside from a revenue quality perspective. We're expecting a higher than normal capture of our general rate increase. We are making structural changes in all of our contracts as we move forward. We're just over 50% now of our customer base that we have renewed, so we still have some work to do there and some upside potential. We've also seen small business as our fastest-growing segment again last quarter. That, of course, is a great lift from a yield perspective. Yes, we're clear-eyed that the comps are aggressive, but we still feel pretty confident in the pricing environment as we move forward.

[Brie Carere, EVP and Chief Marketing Communications Officer at FedEx]

We think we're doing a good job of managing kind of revenue quality as well as product and customer mix.

[Operator]

Our next question comes from Helane Becker with Cowen. Your line is open.

[Helane Becker, Managing Director and Senior Advisor at Cowen]

Oh, thanks very much, operator. Hi, everybody. Two questions. The first is, Mike, would you still consider share repurchases as aggressively as you are if Congress instituted a tax on them? The second question is with regard to sustainability and how you're thinking about improving or reducing your carbon footprint, either through, you know, use of SAF for the aircraft fleet or shifting to, you know, different electric vehicles and so on. Just kind of wondering how you're thinking about that, maybe longer term over the next five or seven years.

[Mike Lenz, EVP and CFO at FedEx]

Helane, this is Mike. I'll take the first part of that. Yeah, we are aware of proposed legislation related to the repurchase as you mentioned there. You know, our transaction will largely complete in December, so we'll just have to see how that would play out subsequent to that. That's the accelerated share repurchase delivers much of it upfront.

[Raj Subramaniam, President and COO at FedEx]

Helane, on the carbon neutral goals, you know, we have announced, and we are very proud of it, the fact that we announced that we achieved carbon neutrality across our global operations by 2040. We didn't do this casually. We thought about this a lot. You know, vehicle electrification is a key path to our success here.

[Raj Subramaniam, President and COO at FedEx]

We are expanding the use of electric vehicles that'll lead to significant reductions. We expect that 50% of FedEx Express global PUD vehicles will be electric by 2025, rising to 100% of purchases by 2030. We're making good progress there. We have line of sight on the over-the-road vehicles. On the SAFs, yes, you know, we will obviously look at that, but SAF represents a very small piece of the demand, and also the cost is not where it needs to be yet. We know that there's some fundamental research needs to be done to really address this issue, and that's part of the reason why we're investing $100 million with the Yale to create the Yale Center for Natural Carbon Capture.

[Raj Subramaniam, President and COO at FedEx]

again, the initial work will focus on to offset the equivalent of current emissions from the aviation industry. Lots more to come here. again, this is something we are very serious about and working with the best minds to get the answers.

[Operator]

Ladies and gentlemen, once again, please press star one to ask a question. We'll take our next question from Jeff Kauffman from Vertical Research Partners. Your line is open. Please go ahead.

[Jeffrey Kauffman, Analyst at Vertical Research Partners]

Thank you very much, and thank you for taking my question. Fred, while we have you on the phone, I was just curious. There's legislation moving through Congress to affect trade with China. I know there was news about a groundbreaking digital trade agreement between the U.K. and Singapore. I know this has always been a popular topic with you. What is your view on the status of trade policy out there, and can you talk a little bit about any catalysts that might occur that might be beneficial to the company, coming up?

[Frederick W. Smith, Chairman and CEO at FedEx]

Well, we have expressed to both Republican and Democratic administrations that we feel that it was a major mistake for the United States to walk away from the Trans-Pacific Partnership. What that agreement did was to allow us to deepen our trade ties with our other trading partners. Of course, given the leadership of Japan, the other participants did go forward with it. The best way to normalize the relationships with China is to sign TPP and get a more normalized trading relationship which China would like to then join. On the broader issue, obviously, we feel very strongly as our great Secretary of State, Cordell Hull, said decades ago. He and Roosevelt were really the architects of United States promoting open trade. It's when goods cross borders, armies rarely do.

[Frederick W. Smith, Chairman and CEO at FedEx]

The best way to keep a harmonious relationship with China is not to disconnect, to trade where we can and, you know, that's what we support. I'm hopeful that at the end of the day, that cooler heads will prevail, and we'll join the TPP, and we will, you know, try to have that constructive relationship with China. The reality is people forget about this and all of the populist politics. The trade that the United States promoted in the last 30 years gave each household in the United States an increase in disposable income of about $10,000 or $11,000. I mean, it was a huge benefit and an enormous tax decrease. We're strong free traders, and we think we should stay engaged in China, and we hope the administration does that.

[Frederick W. Smith, Chairman and CEO at FedEx]

I quite frankly am optimistic because I think at the end of the day, that view will eventually prevail. Particularly in a period of labor shortage, it's impossible for the United States to manufacture all the goods that consumers in the United States want. I hope that was helpful.

[Operator]

Next, we'll go back to Bascome Majors from Susquehanna. Your line is open.

[Bascome Majors, Senior Equity Research Analyst at Susquehanna]

Yeah, thanks for taking my question. You own the largest less than truckload business in North America. You know, it could do potentially close to $2 billion in EBITDA this year. You know, how do you get investors to focus more and give you more credit for having that valuable asset?

[Mike Lenz, EVP and CFO at FedEx]

Bascome, we appreciate the question. We are very proud of the results of FedEx Freight, and we see great opportunity going forward. It's a key part of the overall enterprise strategy. Raj highlighted some of the collaboration initiatives. It will have a key role as well as it grows the very successful FedEx Freight Direct product that is being well received.

[Mike Lenz, EVP and CFO at FedEx]

I think it will be just continuing to focus on the success as the largest LTL carrier in terms of the revenue quality and sustainability of the performance of the Freight business as a standalone, as well as the synergies that will accrue to the overall enterprise as we increase collaboration beyond what Raj highlighted earlier.

[Raj Subramaniam, President and COO at FedEx]

Let me just reiterate that FedEx Freight is an important part of our overall enterprise strategy. Our results at FedEx Freight are outstanding. Margins illustrate that our strategy is working.

[Operator]

Next, we'll go to David Vernon from Bernstein. Your line is open.

[David Vernon, Managing Director and Senior Analyst at Bernstein]

Hey, good afternoon, everyone. Thank you for taking the question. Raj, I'd love to if you could help us really understand kind of what that opportunity is inside of Europe. I remember when you guys first announced the acquisition of TNT, you shared with us some information around the profitability of the domestic segment versus Europe. Can you give us a sense for whether you're making money in Europe today, what the margin level is and where it can go to?

[Raj Subramaniam, President and COO at FedEx]

We're not gonna break out the numbers for you that you asked for, but let me just address it qualitatively. The rationale for the integration remains as sound as it was when we made the acquisition. You know, the portfolio in Europe, we're talking about international, in and out of Europe, intercontinental. We're very strong there. Intra-European express, we're doing pretty good. It's the intra-European ground business that we had very minimal share. Well, you know, with TNT, we have the best player in that business. Now that being part of this portfolio, and we are, you know, we'll stay very disciplined on the international domestic business.

[Raj Subramaniam, President and COO at FedEx]

We now have the portfolio to make it successful and piece it all together, not only from a customer value proposition perspective, but also from a cost of moving international, especially economy goods on the road. I hope that answered the question. You know, we feel that the restructuring program that we announced earlier this calendar year is on track to make sure that we are as efficient as possible in Europe. There's a lot of things going on. Very excited about what April 2022 brings.

[Mike Lenz, EVP and CFO at FedEx]

Yeah, David, it's Mike. That, it's just important to reiterate that completing the physical integration here at the end of this fiscal year really sets the foundation to enable this opportunity going forward, and we can certainly expand upon that in further detail when you all come visit us in June.

[Operator]

Next, we'll go to Bruce Chan from Stifel. Your line is open.

[Bruce Chan, Director at Stifel]

Hey, thanks operator, and good evening, everyone. Maybe just another one on the LTL side, because we've spoken a bit about the ground network expansion here. You know, for LTL, you've got several peers that are adding some meaningful terminal capacity. Maybe you could just give us a sense of where you are right now in terms of freight facility utilization and then, you know, whether you plan to grow the network there as well. Thank you.

[Raj Subramaniam, President and COO at FedEx]

The LTL side, our utilization is strong, but we are very disciplined in how we manage that business. The revenue quality and efficiency are watch words as we are the number one revenue share in this segment. The demand for our business continues strong, our revenue quality remains strong, and we will be very judicious in how we add capacity.

[Mike Lenz, EVP and CFO at FedEx]

Yeah. Bruce, this is Mike. You know, ADS grew 3% in the quarter. You know, the revenue quality focus came through in the bottom line, and we continue with our initiatives to incorporate technology into the LTL business to do exactly what you ask about there and enhance the efficiency and utilization of our assets.

[Operator]

Our last question comes from Todd Fowler with KeyBanc Capital Markets. Your line is open.

[Todd Fowler, Director at KeyBanc Capital Markets]

Great. Thanks and good evening, everyone. Just to close out on ground margins. It sounds like you've got some stabilization now as we move into the back half of the year. How do we think about the longer term path to moving beyond kind of the high single to low double-digit margin range you've been in? Obviously, there's been a lot of revenue growth in the segment, but how do we move kind of beyond the margin range of the past couple of years? Is that something that you need to price, you know, to get the margin level up? Is it getting some of the efficiencies? And how do you think about normalized incremental margins there? Thanks.

[Mike Lenz, EVP and CFO at FedEx]

Todd, this is Mike. I know we threw a lot at you as it relates to the initiatives there, but they will continue to build in terms of, you know, labor is one piece. We talked about the new facilities we opened. You know, those facilities aren't as efficient at the outset. We're seeing that from those that we opened last year. We're also exploring, you know, different ways to even fuller utilize those assets. The technology elements that Raj highlighted. There's a number of components there that come together and will be integral to, you know, driving Ground profitability and margins higher.

[Mike Lenz, EVP and CFO at FedEx]

We're very optimistic about the trajectory there, and getting past this headwind of the labor right now really be a good launching point for these other aspects to gain even more traction.

[Operator]

We have no further questions in the queue. I'll turn it back over to management for closing remarks.

[Frederick W. Smith, Chairman and CEO at FedEx]

Thank you for your participation in the FedEx Corporation second quarter earnings conference call. Feel free to call anyone on the investor relations team if you have additional questions about FedEx. Thank you very much.

[Operator]

That does conclude our call for today. Thank you for your participation. You may now disconnect.

Participants

Executives

• Mickey Foster, VP of Investor Relations
• Raj Subramaniam, President and COO
• Brie Carere, EVP and Chief Marketing Communications Officer
• Mike Lenz, EVP and CFO
• Frederick W. Smith, Chairman and CEO

Analysts

• Brandon Oglenski, Director and Senior Equity Analyst at Barclays
• Ravi Shanker, Managing Director at Morgan Stanley
• Kenneth Hoexter, Managing Director at Bank of America
• Tom Wadewitz, Senior Equity Research Analyst at UBS
• Chris Wetherbee, Senior Research Analyst at Citi
• Jack Atkins, Research Analyst at Stephens
• Duane Pfennigwerth, Senior Managing Director and Equity Research Analyst at Evercore ISI
• Jordan Alliger, VP and Equity Research Analyst at Goldman Sachs
• Brian Ossenbeck, Senior Analyst at JPMorgan
• Scott Group, Managing Director and Senior Analyst at Wolfe Research
• Helane Becker, Managing Director and Senior Advisor at Cowen
• Jeffrey Kauffman, Analyst at Vertical Research Partners
• Bascome Majors, Senior Equity Research Analyst at Susquehanna
• David Vernon, Managing Director and Senior Analyst at Bernstein
• Bruce Chan, Director at Stifel
• Todd Fowler, Director at KeyBanc Capital Markets